We're Not Very Worried About Celsius Resources' (ASX:CLA) Cash Burn Rate

By
Simply Wall St
Published
September 16, 2020
ASX:CLA

We can readily understand why investors are attracted to unprofitable companies. For example, Celsius Resources (ASX:CLA) shareholders have done very well over the last year, with the share price soaring by 106%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether Celsius Resources'cash burn is too risky For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Celsius Resources

Does Celsius Resources Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2019, Celsius Resources had cash of AU$6.2m and no debt. Importantly, its cash burn was AU$3.5m over the trailing twelve months. So it had a cash runway of approximately 21 months from December 2019. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:CLA Debt to Equity History September 16th 2020

How Is Celsius Resources' Cash Burn Changing Over Time?

Celsius Resources didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Notably, its cash burn was actually down by 58% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Admittedly, we're a bit cautious of Celsius Resources due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Celsius Resources To Raise More Cash For Growth?

There's no doubt Celsius Resources' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Celsius Resources has a market capitalisation of AU$29m and burnt through AU$3.5m last year, which is 12% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Celsius Resources' Cash Burn Situation?

The good news is that in our view Celsius Resources' cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong cash burn reduction. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 4 warning signs for Celsius Resources that investors should know when investing in the stock.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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